When you buy a home in Canada, you are only required to make a minimum payment of 5%. There is however one stipulation. If your down payment is less than 20%, you must obtain mortgage default insurance from the Canada Mortgage and Housing Corporation (CMHC).
This insurance is in place to protect lenders. If you default on your mortgage the CMHC will step in to limit losses incurred by the lender.
To apply for this required insurance, applicants must meet specific criteria.
On July 1, changes were made to these requirements that further tighten mortgage lending rules.
Debt Measurements
When determining whether you qualify for mortgage default insurance, the CMHC looks at two measurements of non-mortgage debt (car loans, credit cards, lines of credit, etc.).
These two measurements are:
Gross Debt Service (GDS) – measures housing costs such as mortgage, property taxes, heating and condo fees in relation to your total gross household income. Before July 1, these expenses could not be more than 39% of your income.
GDS = (Principal + Interest + Taxes + Heat) / Gross Annual Income
Total Debt Service (TDS) – measures you housing costs plus debt obligations in relation to your total gross household income. Before July 1, this amount could not exceed 44% of your gross household income.
TDS = (Principal + Interest + Taxes + Heat + Debt) / Gross Annual Income
Changes Being Made To GDS and TDS
As of July 1, there are new limits being placed on the amount of housing and other debt that applicants can have.
GDS must now be no more than 35% of your household income and TDS cannot exceed 42%.
Credit Scores
Credit scores are a measurement of current debt and historical ability to manage debt expressed as a number between 300 and 900.
Prior to July 1, applicants had to have a credit score of at least 600.
Changes Being Made To Credit Score
As of July 1, at least one of the applicants must have a credit score of 680.
Borrowing Down Payments
Previously, there were no restrictions on how a down payment was obtained. The CMHC would consider the funds an asset whether it was cash savings, a private loan (from parents and relatives), a line of credit (LOC), or even credit cards.
Changes To Down Payment Rules
As of July 1, the CMHC is not going to consider funds that have been borrowed via loan, LOC or credit cards an asset for insurance purposes.
For more information on these changes and how they may affect your home buying plans or financial goals, contact us today.
